Investors Now Pick Twice as Many Funds for Retirement: Millionaire Corner

Desire to diversify explains why participants have doubled to 5.3 funds on average

With a wider choice of investment options in their retirement plans, participants are picking twice as many mutual funds to include in their plan portfolios, said the Spectrem Group in a report issued Wednesday.

Plan participants cited 37% of the time that diversification was the reason for choosing so many more funds: 5.3 on average in 2011, nearly double the 2.7 that participants included in their plans in 1996, according to “Asset Allocation Decisions of Plan Participants” on Spectrem’s Millionaire Corner website.

Not only do the data reflect the much larger selection of mutual funds now offered by many plan sponsors—19.4 funds offered today in 401(k) plans, compared to only 6.3 in 1996—but an increasing emphasis on diversification.

(Read ‘The Dollar’s Decline Drives Homes a Diversification Lesson’ at AdvisorOne.)

The number of funds that participants include has grown steadily. In 2000, the average number chosen for inclusion in a participant’s plan from among those offered by a plan sponsor was 3.4. In 2005, the number was 4.6.

Use of asset allocation funds is also on the rise. According to Spectrem’s research, approximately 72% of investors had the option of some kind of asset allocation fund offered within their plans. Some plans included lifestyle funds; more included target date funds, but the biggest concentration of plans, 34%, offered both kinds of funds as options.

In 2008, only 36% of plan participants availed themselves of these asset allocation funds. By 2011 that number had reached 50%.

In addition to a broader selection of fund availability, another reason participants are opting for a wider variety of funds within their accounts is investment education.

In 1996, Spectrem says, employee education on their retirement plan investments was a “relatively new offering.” Now it is far more common, and even though it can be difficult to detect the point at which education becomes advice, the company says that the amount of guidance, education and advice have all risen substantially.

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